The term amortization is frequently used by corporate financial officers and accountants when discussing the impact of time on financial statements. It is often encountered context of loan calculations and determining interest payments. The word originates from Middle English “amortisen,” meaning to “alienate” or “kill,” which itself derives from the Latin “admortire,” signifying “plus death.” This etymology is also loosely connected to the word “mortgage.”
In accounting, amortization is similar to depreciation in that it reduces the value of a liability or asset over a period through scheduled payments. It accounts for the practical lifespan of a tangible asset and sets a timeframe for repaying liabilities. In the case of liabilities, it involves a predetermined timeframe for repayment. In this manner, a specific sum is allocated for loan repayment throughout its duration.
Although depreciation and amortization share similarities, they cover different areas. Depreciation is typically used to describe physical assets such as property, vehicles, or buildings, whereas amortization is applied to intangible assets like product development, copyrights, or patents. Regarding liabilities, amortization relates to future income that will be disbursed over a set period, while depreciation represents lost income over time.
Various forms of amortization are employed based on the accounting method used. Business amortization addresses borrowed funds and loans, specifying repayment schedules. When used as amortization analysis, it serves as a means of cost execution analysis for a given set of operations. In tax law, it refers to the interest paid over a specific period concerning payments and tax rates. Amortization can also be applied to zoning rules and regulations, as it conveys a property owner’s timeframe for relocation due to zoning guidelines and pre-existing use.
Another variation is negative amortization, which specifically refers to increasing loan amounts resulting from the failure to pay the total interest due at the appropriate time.
Amortization periods can vary widely, from as short as a year to as long as forty years, depending on the type of loan or asset. For instance, building loans might span up to forty years, while car loans typically last four to five years. Patent right expenses are usually amortized over seventeen years.
